Today's subprime mortgages are regulated by the Consumer Financial Protection Bureau and have far more rigorous qualifying standards than the subprime loans of the mid-2000s. You need to meet minimum credit score requirements and prove that you can comfortably afford to pay the loan.

Subprimes Have Evolved

Subprimes are essentially "poor credit" mortgages that are designed to help potential home buyers who may not qualify for a conventional loan. They are marketed toward consumers whose credit score falls short of the 620 to 640 minimum standard of a traditional lender and those who have a high debt load relative to their income. Since these loans are risky to lenders, a subprime mortgage usually comes with a higher interest rate. The name "subprime" means that the interest rate is above the prime lending rate offered to customers with strong credit histories.

Subprime Credit Requirements

In today's market, the largest group of poor credit lenders are those backed by the Federal Housing Administration, the Department of Agriculture and the Department of Veterans Affairs. The FHA qualifies borrowers with a credit score as low as 500, although you'll need a score of 580 if you can only make the FHA minimum down payment of 3.5 percent. USDA loans specifically help rural home buyers that earn less than 115 percent of the area's median income – the minimum credit score requirement is 640 but there's no down payment and nothing to pay out of pocket.

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Affordability Is Key

The distinguishing feature of today's subprimes is that you are not allowed to borrow more than you can afford to repay. Lenders look at your housing payments – mortgage, interest, property taxes and insurance payments – together with your debt obligations such as car loans and child support. Lenders are unlikely to qualify you for a loan if these payments represent more than 43 percent of your gross monthly income. Potential home buyers with low credit scores must sign up for home buyer's education classes approved by the Department of Housing and Urban Development. These sessions prepare poor-credit homebuyers to make the right decisions when purchasing and financing a home.

Apply in the Usual Way

The process for obtaining a subprime home loan is the same as the process for obtaining a conventional loan. Gather the details you need including pay slips, income tax returns, and credit and savings information, and then fill out a loan application. The lender looks at your credit score, the size of the down payment, adverse events such as late payments on your credit report, your debt-to-income ratio and other factors to determine whether you're eligible for a loan. Find FHA lenders on HUD's Lender List website page. Not all lenders have the same eligibility requirements, so if one lender denies your application, try with a different lender until you find one that approves your loan.

A Note About Interest Rates

By definition, subprime mortgages come with higher interest rates than prime mortgages, and the lower your credit score, the higher your percentage rate will be. One option is to delay getting a mortgage and wait until your credit score increases. Paying down credit card balances, making bill payments on time, and paying off collection accounts are positive steps you can take to increase your credit score. Bear in mind that if you are offered a higher rate, you are not tied into this rate indefinitely. After you show that you are capable of paying your mortgage on time, your credit score should increase, and you can refinance your loan at a lower rate.

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About the Author

Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced real estate law in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous property sites including Housemaster, For Rent and Active Rain. Find her at www.whiterosecopywriting.com.